Regular U.S. Shared funds are at the mercy of strict go through treatment and 1099 confirming rules. Foreign funds organized through foreign corporations are not subject to the same reporting requirements to their U.S. Compared to their U.S. Americans who invests in foreign mutual money, life insurance procedures, savings plans portfolio bonds, and similar finance arrangements. A prior tax advantage of purchasing a foreign company was the deferral of U.S. by means of a dividend distribution or the investment was sold.
What is a PFIC? 2. At least 50% of their resources held during the year to produce aggressive income. Passive income includes dividends, interest, rents, royalties, foreign currency increases, and capital increases from assets that produce passive income. Foreign mutual funds are most commonly considered PFICs because their income is practically 100% passive. Foreign partnerships and other investment vehicles can also be considering PFICS by U.S.
It may also be easy to be unaware of a taxpayer’s PFIC involvement. They can be embedded in other investments such as publicly traded partnerships and many taxpayers have no idea that foreign-shared funds have special U.S. Penalties may be incurred for incorrect reporting or failing to record PFICs, even if the taxpayer is unaware there was a reportable activity.
U.S. taxpayers are required to record information related to their immediate or indirect PFIC investment to the IRS on Form 8621 if they receive a distribution from the investment or recognize a gain on the disposition of the stock. Even in the lack of current income, Form 8621 can be used to make any one of a number of elections also, the most relevant of which is talked about later. Often the distribution or disposition of stock are available on the taxpayer’s international investment claims or on a K-1 that has an investment in a PFIC. An indirect shareholder is one who possesses a PFIC through a pass-through entity, another PFIC investment, or a non-passive international corporation’s possession.
If one of these chains of ownership exists, an application 8621 must be submitted for each PFIC or one form may be submitted with an attachment that lists all the other PFICs’ information. Taxation generally occurs when the PFIC makes a distribution to the taxpayer or when the taxpayer gets rid of his PFIC investment.
- A method of payment (like US dollars)
- Are there any exceptional issues that can’t be reversed? (E.g. Commitments, agreements)
- R = annual interest, as a decimal rather than percent (also called APR)
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1. Distributed income is taxed as regular income at the best current ordinary Federal taxes rate. 2. Capital increases are changed into ordinary income and taxed as the best current ordinary Federal government tax rate. Long-term capital gain treatment does not apply. 3. Deferred increases are at the mercy of a non-deductible interest penalty, which is compounded over the deferral period.
This can be prevented by making a “mark-to-market” election, as is talked about below. 4. Excess distributions, which are distributions received in the current year that exceed 125% of the average distribution from the last 3 tax years, have a more complicated tax computation. When a surplus distribution is received, each day in the shareholder’s holding period of the stock it is allocated to. The portion assigned to the existing tax year is roofed in ordinary income and taxed accordingly.
The portion assigned to previous taxes years is not contained in current season taxable income but taxed at the best ordinary rate for each year and included in the total tax liability for the current year. An interest charge must also be calculated on the tax liability for each year, similar to the deferred gain interest charges. In essence this is a late payment fee and the distributions might not be offset by net operating losses.
An election to escape this penalty is talked about below. The best way to get away from the rigorous reporting requirements of PFICs might be to avoid them all together. If that’s not an option or the taxpayer has a strong fascination with them, it may be wise to consider electing to treat the PFIC as a professional Electing Fund (QEF).